Rife With Repositionings

Many in the industry have suggested the time for renovations is now as the end of the current cycle may be nearing, but investing in properties is just one component of the core strategy for Driftwood Hospitality Management, LLC, which has carved its niche as a turnaround specialist.

In fact, the North Palm Beach, FL-based management company recently completed the renovation and repositioning of four assets for some $31 million. Driftwood, which has more than 40 hotels and 8,000 rooms in its portfolio, continues to look at acquiring assets and repositioning them as an opportunity.

Steve Johnson, EVP and Principal-acquisitions, detailed the company’s strategy. “Our goal at this point is to keep our powder dry and see if there are some fair deals out there. Maybe they have a little bit of upside with a renovation, or in a year or two there will be [projects] that need to be renovated again. It’s not that we’re smarter than everyone else, but we’re a lot more unique. We can go in and look at something and say ‘we should do a piece of the real estate this way’ and it will release the value,” he said.

The four most recent projects include the Westin Tyson’s Corner; the Hilton Washington DC/Rockville Hotel & Executive Meeting Center; and the dual-branded Crowne Plaza and Holiday Inn Express Springfield. The company also has a couple of renovation projects in progress with the Hilton Saratoga and the Continental South Beach, both of which are scheduled to be completed by the end of the year.

The Hilton Washington DC/Rockville Hotel & Executive Meeting Center—which the company acquired, with help from a private equity group from New York, in September of 2015—completed a $12 million renovation in early June. Johnson, who has been with the firm since 2002 and handles acquisitions and dispositions, elaborated on why he put together the deal.

“It really kind of fit in our profile with a good location and good bones, but a lot of underutilized real estate within the core of the building,” said Johnson. “I look for those kinds of assets that are underutilized, but where the general real estate parameters and dynamic is solid.”

He noted that the company redeveloped the atrium area, converted a first-floor bar into a restaurant, added some 5,000-square feet of meeting space and completely renovated the 315 guestrooms, among other changes.

Meanwhile, Driftwood acquired the Crowne Plaza and Holiday Inn Express from a special servicer in December of 2014, according to Johnson, who added that Springfield was not a target market for the company. However, he noted that one of the draws of the property, in addition to the “really cheap” price, was that the property was built with some 70,000 square feet of meeting space that was originally intended to be a casino. The company has completely restored the guestrooms, bathrooms and corridors at both hotels with new furniture, contemporary and artwork and new carpet and tile.

Johnson pointed out that Driftwood now operates a number of properties for special servicers, due in large part to its hands-on management approach led by company President David Buddemeyer. “They [special servicers] said ‘wow, the president of the company knows my P&L and knows what’s going on at the property.’ Once they realized that we kind of got in their rotation so we picked up a lot of repeat business,” he said.

In addition, Driftwood assumed management of the Westin Tyson’s Corner in early 2015 and began renovations shortly thereafter. Each of the 405 rooms has been refurbished and the public space redesigned using Starwood’s forest-inspired “Haven” concept.

According to Johnson, the company has bought over $500 million worth of hotels and is approaching three quarters of a billion in total capitalization, including the renovations, since he joined. He estimated that Driftwood has equity in roughly 25 percent of its portfolio and further detailed the company’s long-term strategy with the assets, generally speaking.

“Our main specialty is buying with a private equity group. We work out a business plan, which usually includes a major renovation, but we also really scrub the numbers and operate them efficiently. Then in three to five years we look to sell it,” he said.

As an example, Johnson noted during the current cycle Driftwood bought 10 hotels and the company has traded seven of the 10 assets already, while retaining management in three of them. In fact, it recently sold the Hilton Tampa, which had been converted from a Hyatt, for $101 million, which represented a record price for Driftwood.

Assessing current economic conditions, Johnson did note, “right now it might be difficult to be a seller.” He also maintained the company is still seeing opportunities on the buy side. For example, Driftwood is currently under contract for a property in Dallas.

To provide additional growth opportunities, the company has also formed a subsidiary called Driftwood Acquisitions and Development (DAD), which will focus on what Johnson described as “more stable assets” or smaller scale deals. EVP Carlos Rodriguez put together the fund for the company with the help of some wealthy investors and Johnson noted the returns are more in the 12-15 percent cash-on-cash range.

“It’s a brilliant way of attacking that side of the business, which our private equity groups don’t all want to do,” he said, adding the company underwrites all the deals.

In addition, Driftwood has launched an EB-5 program that is designed to help finance a pipeline of premiere investments through the development and acquisition of hotels. Johnson noted most of the foreign investors are primarily from China and Latin America thus far.

In July, the company, along with American Opportunity Regional Center, celebrated the groundbreaking of a new EB-5 property, the Doral DoubleTree by Hilton in Miami. Driftwood will manage the $26 million project. In June, the company celebrated the grand opening of the Residence Inn by Marriott Flagler Station in Miami, the first hotel to open under the program.

“We’ve got a handful of those deals. Our bread and butter is buying the fixer uppers, but what we discovered in the last downturn is that once cycle gets mature you need to have other avenues of growth,” he said.